Entertainment

NFTs and blockchain gaming had a breakout — and controversial — year

This past year saw the collision of crypto and gaming in unprecedented fashion.

Axie Infinity

The blockchain title Axie Infinity combined cryptocurrencies and NFTs to create a real-world economy in the shape of a video game.

Image: Sky Mavis

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Twelve months ago, if you had told anyone working in games that the industry would be split into factions now at each other’s throats over the future of game monetization and design, your first assumption on what to blame might be the age-old console wars. After all, top of mind for most gaming fans last December was trying, and likely failing, to procure a PlayStation 5.

Instead, 2021 was the year crypto and video games collided, bringing non-fungible tokens, cryptocurrency and the broader promise and perils of blockchain gaming into the limelight. And now it’s gotten ugly, as the so-called Web3 movement has become ensnared by a wider-scale fight for the soul of the internet and who really stands to benefit by rebuilding it for a new generation.

It’s been many years since the mobile industry rose from its crude beginnings on the fringes of what’s considered gaming’s mainstream, and many of the monetization tactics from that market — free-to-play, pay-to-win, loot boxes and microtransactions — have become commonplace in the biggest, most established series on console and PC.

Despite the detractors, those tools became effective ways to keep games active and profitable over long periods of time, giving rise to the games-as-a-service model and helping offset, at least partially, the ballooning costs of big-budget game development. Too often, however, this has come at the expense of the average consumer now paying for games in more ways than one.

To crypto skeptics, this newfound obsession with speculative assets like NFTs and crypto tokens is yet another exploitative practice from an industry that has perfected the act of extracting revenue from customers and sustaining products long after their shelf life. Like the crypto market at large, the NFT and blockchain gaming space has its fair share of scams, as well as get-rich-quick and pyramid-structured schemes designed to sucker those late to the party for the benefit of the early movers. That large game makers now want in and Silicon Valley is pouring money into startups casting this future as bold and revolutionary is a sign of moral bankruptcy in the eyes of some of Web3’s harshest critics.

“Not only is this ethically dubious, but there's no practical reason to implement NFTs into your game. Certainly not for buying/trading ‘unique’ loot,” Harper Jay MacIntyre, community manager at Psychonauts creator Double Fine, wrote on Twitter in response to Ubisoft’s recent NFT product launch. “It's a scam. The more people in our industry who are willing to say so publicly, consequences be damned, the better.”

Xbox chief Phil Spencer has also cast some doubt on the near-term future of these technologies, saying they hold promise only if the industry can find real problems to solve instead of creating speculative markets designed primarily to enrich a small slice of participants.

“There's a near-term kind of hysteria around NFTs, which I think is as much driven by speculation as real end-user benefit. And so I'm just leery of that,” Spencer told Protocol this month. “In the long run, I think there is a real benefit to players to having open standards for digital entitlements, so that I don't have to buy the same content multiple times on different devices, so that I can gift the things that I own to different people.”

But the true believers think the rest of the industry is missing out on the next big wave in the game industry. This paradigm shift, in which decentralization, alongside new platforms and business models, will revolutionize digital ownership of virtual goods and give players an opportunity to both earn money from and be invested in the success and direction of new virtual game platforms.

We’re seeing it happen already with games like Sky Mavis’ Axie Infinity. In 2021, the Pokémon-like game, based out of the Philippines, became the poster child of this so-called pay-to-win model, in which cryptocurrencies and NFTs create what looks very much like a real-world economy in the shape of a video game. Some players are now playing Axie Infinity as a primary source of income, and one can participate in the game’s DAO (decentralized autonomous organization), overseeing its future direction, although its financial stability has recently come under fire over concerns of volatility.

Back in October, Andreessen Horowitz general partner Arianna Simpson said decentralization “is rapidly changing the web as we know it, and nowhere is this more obvious and exciting than in gaming,” in a blog post announcing the venture firm’s investment in Sky Mavis. “Giving players freedom and ownership in a gaming experience drives immense loyalty, as Axie has proven,” Simpson added. “What this means for the future of games, and really the web as we know it, is as big as your imagination will allow. We can’t wait to see where this pioneering team takes their community next.”

At the convergence of all of these developments is the metaverse, the supposed next-generation version of the internet where gaming, social networks and new technologies like AR and VR will supposedly collide to create a 3D, inhabitable world that will transcend existing platforms and perhaps even create an all-new computing layer overlaid on the real world.

It’s what Meta, formerly Facebook, has bet the entire company’s future on. “We believe the metaverse will be the successor to the mobile internet,” Meta CEO Mark Zuckerberg said when announcing the company’s rebranding earlier this year. “Within the next decade, the metaverse will reach a billion people, host hundreds of billions of dollars of digital commerce and support jobs for millions of creators and developers.”

It all sounds fantastical and wrapped in hype — because right now, it is. But if this year made anything clear, it’s that NFTs and blockchain gaming are just a subset of a much larger movement with substantial momentum, and none of it is likely going away anytime soon.

"Everybody in gaming that I know, if they weren't working on an NFT game already, are thinking about how they'd do it or are pivoting hard to it right now," Twitch co-founder Justin Kan told Protocol earlier this month. Kan himself has gotten involved, co-founding a new gaming NFT marketplace called Fractal that was in the news recently because it fell victim to a Discord scam costing users a collective $150,000. Kan and the Fractal team said they will compensate victims, but cautioned users in a blog post that “we must use our best judgement as there’s no ‘undo button’ in crypto.”

The numbers don't lie about the sector’s eye-popping growth. Investments in blockchain and NFT-related gaming companies comprised 20% of the total $9 billion in private financing in the first nine months of 2021, according to investment firm Drake Star Partners. And NFT games generated more than $2.3 billion, or 22% of all NFT trading volume, in just the third quarter of the year, according to a report released this month by the Blockchain Gaming Alliance. The same report says the number of new digital wallets created for blockchain games rose 2,453% in the first nine months of this year.

“Blockchain gaming has firmly established itself as the industry’s darling. With the consumer growth participating in blockchain games, dapp and gaming trends will come together into something even bigger and potentially all-encompassing: the Metaverse,” Dragos Dunica, co-founder of decentralized app store DappRadar, wrote in the BGA’s report. “We’re headed towards a complete shift in how we form communities, create, play, trade, and socialize. Blockchain gaming is catalyzing the establishment of the virtual hubs that will host this new digital life.”

Yet even as the movement gains steam and collects massive funding along the way, mainstream consumers appear to be rejecting efforts to inject these technologies into traditional products. Ubisoft’s Quartz announcement became a lightning rod for debate around NFTs, with tens of thousands of people downvoting the company’s YouTube video. Earlier data about aftermarket sales of Ubisoft’s Ghost Recon NFT cosmetics also shows paltry sales in the low double-digits with a total trading volume of around $400.

In an interview with Protocol this month, Ubisoft defended Quartz as an early test of blockchain gaming. “Ninety percent of the people now saying you can do the same with older technology, they haven’t tried [blockchain gaming],” said Nicolas Pouard, the vice president of the publisher’s Strategic Innovation Lab, which conceived Quartz. “It's not enough to disregard what they’re saying. We have to respect what they’re saying. There’s real concern … For people who don’t believe in it, just start by trying it.”

While many of Ubisoft’s peers have either kept quiet or steered clear of NFTs and blockchain gaming, other smaller companies have dived in, to mixed results. Developer GSC Game World announced and then quickly canceled its plans to add NFTs to its upcoming shooter S.T.A.L.K.E.R. 2: Heart of Chernobyl after massive fan outcry. “The interests of our fans and players are the top priority for the team. We’re making this game for you to enjoy — whatever the cost is. If you care, we care too,” the company wrote in an apology note.

Meanwhile, Fable co-creator Peter Molyneux, who now runs indie studio 22cans, announced his newest simulation game, Legacy, a blockchain title made in partnership with Gala Games that has already sold more than $50 million in virtual real estate before it has even launched.

“Legacy is a game that makes you feel creative. Now, the fact that you feel creative is great. You know, I love spaghetti Bolognese or a beautiful picture. But if no one ever sees it, if no one ever buys it, then you know, you might as well not have done it,” Molyneux told The Verge about why Legacy needed to be a blockchain game. “The fact that your design has gone on to be seen and appreciated by other people that make money is, I think, the big thing. That’s in addition to the fact that this is blockchain gaming and people can make money while playing a business simulation.”

Where this all goes from here is anyone’s guess, but the feud between NFT and blockchain proponents and those who don't want it anywhere near the game industry is likely to grow more bitter. “It’s becoming increasingly difficult to discuss anything blockchain-related. The topic has saturated the airwaves and we’re only allowed to be in favor of, or against it,” wrote game industry analyst Joost van Dreunen in an issue of his newsletter earlier this month. “You’re either a self-indulgent social media exhibitionist showboating your digital wealth or a ‘true creative’ who prioritizes art over ownership.”

What van Dreunen has correctly observed, however, is that the future of the game industry is in the gray area between these extreme positions on crypto. Video games are undergoing substantial change in how they are made, funded, distributed and monetized due not only to Web3 technologies, but also models from music and other industries like subscription gaming and cloud-based streaming.

The biggest game makers in the world are trying to adapt to a services future because the old model of pumping out giant hit after hit to a core audience that wants to pay only $60 for a game forever is not reflective of the much larger, more casual and mobile-centric gaming audience or the direction of the medium as an art form. To figure out where crypto fits in here will involve a sustained back-and-forth between the skeptics, the true believers and those tasked with actually building the products and keeping them afloat.

“We started the year thinking it would be impossible for the market to match 2020, as delays for AAA releases and ongoing supply shortages for new gaming hardware gave people little opportunity to spend. Yet, nine months into 2021, we realized that the market would grow again,” said Tom Wijman, Newzoo’s head of Reports and Forecasting, in the analytics firm’s annual end-of-year report.

“If anything, this shows that the games market is definitely no longer the seasonal, hit-driven business it once was,” Wijman added. “New gaming content no longer means new games or new hardware — a new season pass is just as likely to drive revenues.”

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